The world’s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt. The glory days of the highly profitable global oil companies have come to an end. All that remains now is a mere shadow of the once mighty oil industry that will be forced to continue cannibalizing itself to produce the last bit of valuable oil.

I realize my extremely unfavorable opinion of the world’s oil industry runs counter to many mainstream energy analysts, however, their belief that business, as usual, will continue for decades, is entirely unfounded. Why? Because, they do not understand the ramifications of the Falling EROI – Energy Returned On Invested, and its impact on the global economy.

For example, Chevron was able to make considerable profits in 1997 when the oil price was $19 a barrel. However, the company suffered a loss in 2016 when the price was more than double at $44 last year. And, it’s even worse than that if we compare the company’s profit to total revenues. Chevron enjoyed a $3.2 billion net income profit on revenues of $42 billion in 1997 versus a $497 million loss on total sales of $114 billion in 2016. Even though Chevron’s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

Unfortunately, energy analysts, who are clueless to the amount of destruction taking place in the U.S. and global oil industry by the falling EROI, continue to mislead a public that is totally unprepared for what is coming. To provide a more realistic view of the disintegrating energy industry, I will provide data from seven of the largest oil companies in the world.

The World’s Major Oil Companies Debt Explode Since The 2008 Financial Crisis

To save the world from falling into total collapse during the 2008 financial crisis, the Fed and Central Banks embarked on the most massive money printing scheme in history. One side-effect of the massive money printing (and the purchasing of assets) by the central banks, was that it pushed the price of oil to a record $100+ a barrel for more than three years. While the large oil companies reported handsome profits due to the high oil price, many of them spent a great deal of capital to produce this oil.

For instance, the seven top global oil companies that I focused on made a combined $213 billion in cash from operations in 2013. However, they also forked out $230 billion in capital expenditures. Thus, the net free cash flow from these major oil companies was a negative $17 billion… and that doesn’t include the $44 billion they paid in dividends to their shareholders in 2013. Even though the price of oil was $109 in 2013; these seven oil companies added $45 billion to their long-term debt:

As we can see, the total amount of long-term debt in the group (Petrobras, Shell, BP, Total, Chevron, Exxon & Statoil) increased from $227 billion in 2012 to $272 billion in 2013. Isn’t that ironic that the debt ($45 billion) rose nearly the same amount as the group’s dividend payouts ($44 billion)? Of course, we can’t forget about the negative $17 billion in free cash flow in 2013, but here we see evidence that the top seven global oil companies were borrowing money even in 2013, at $109 a barrel oil, to pay their dividends.

Since the 2008 global economic and financial crisis, the top seven oil companies have seen their total combined debt explode four times, from $96 billion to $379 billion currently. You would think with these energy companies enjoying a $100+ oil price for more than three years; they would be lowering their debt, not increasing it. Regrettably, the cost for companies to replace reserves, produce oil and share profits with shareholders was more than the $110 oil price.

There lies the rub….

One of the disadvantages of skyrocketing debt is the rising amount of interest the company has to pay to service that debt. If we look at the chart above, Brazil’s Petrobras is the clear winner in the group by adding the most debt. Petrobras’s debt surged from $21 billion in 2008 to $109 billion last year. As Petrobras added debt, it also had to pay out more to service that debt. In just eight years, the annual interest amount Petrobras paid to service its debt increased from $793 million in 2008 to $6 billion last year. Sadly, Petrobras’s rising interest payment has caused another nasty side-effect which cut dividend payouts to its shareholders to ZERO for the past two years.

Petrobras Annual Dividend Payments:

2008 = $4.7 billion

2009 = $7.7 billion

2010 = $5.4 billion

2011 = $6.4 billion

2012 = $3.3 billion

2013 = $2.6 billion

2014 = $3.9 billion

2015 = ZERO

2016 = ZERO

You see, this is a perfect example of how the Falling EROI guts an oil company from the inside out. The sad irony of the situation at Petrobras is this:

If you are a shareholder, you’re screwed, and if you invested funds (in company bonds, etc.) to receive a higher interest payment, you’re also screwed because you will never get back your initial investment. So, investors are screwed either way. This is what happens during the final stage of collapsing oil industry.

Another negative consequence of the Falling EROI on these major oil companies’ financial statements is the decline in profits as the cost to produce oil rises more than the economic price the market can afford.

Major Oil Companies’ Profits Vaporize… Even At Higher Oil Prices

To be able to understand just how bad the financial situation has become at the world’s largest oil companies, we need to go back in time and compare the industry’s profitability versus the oil price. To find a year when the oil price was about the same as it was in 2016, we have to return to 2004, when the average oil price was $38.26 versus $43.67 last year. Yes, the oil price was lower in 2004 than in 2016, but I can assure you, these oil companies weren’t complaining.

In 2004, the combined net income of these seven oil companies was almost $100 billion….. $99.2 billion to be exact. Every oil company in the group made a nice profit in 2004 on a $38 oil price. However, last year, the net profits in the group plunged to only $10.5 billion, even at a higher $43 oil price:

Even with a $5 increase in the price of oil last year compared to 2004, these oil companies combined net income profit fell nearly 90%. How about them apples. Of the seven companies listed in the chart above, only four made profits last year, while three lost money. Exxon and Total enjoyed the highest profits in the group, while Petrobras and Statoil suffered the largest losses:

Furthermore, the financial situation is in much worse shape because “net income” accounting does not factor in the companies’ capital expenditures or dividend payouts. Regardless, the world’s top oil companies’ profitability has vaporized even at a higher oil price.

Now, another metric that provides us with more disturbing evidence of the Falling EROI in the oil industry is the collapse of the “Return On Capital Employed.” Basically, the Return On Capital Employed is just dividing the company’s earnings (before taxes and interest) by its total assets minus current liabilities. In 2004, the seven companies listed above posted between 20-40% Return On Capital Employed. However, this fell precipitously over the next decade and are now registering in the low single digits:

In 2004, we can see that BP had the lowest Return On Capital Employed of 19.68% in the group, while Statoil had the highest at 46.20%. If we throw out the highest and lowest figures, the average for the group was 29%. Now, compare that to the average of 2.4% for the group in 2016, and that does not including BP and Chevron’s negative returns (shown in Dark Blue & Orange).

NOTE: I failed to include the Statoil graph line (Magenta) when I made the chart, but I added the figures afterward. For Statoil to experience a Return On Capital Employed decline from 46.2% in 2004 to less than 1% in 2016, suggests something is seriously wrong.

We must remember, the high Return On Capital Employed by the group in 2004, was based on a $38 price of oil, while the low single-digit returns by the oil companies in 2016 were derived from a higher price of $43. Unfortunately, the world’s largest oil companies are no longer able to enjoy high returns on a low oil price. This is bad news because the market can’t afford a high oil price unless the Fed and Central Banks come back in with an even larger amount of QE (Quantitative Easing) money printing.

I have one more chart that shows just how bad the Falling EROI is destroying the world’s top oil companies. In 2004, these seven oil companies enjoyed a combined net Free Cash Flow minus dividends of a positive $34 billion versus a negative $39.1 billion in 2016:

Let me explain these figures. After these oil companies paid their capital expenditures and dividends to shareholders in 2004, they had a net $34 billion left over. However, last year these companies were in the HOLE for $39.1 billion after paying capital expenditures and dividends. Thus, many of them had to borrow money just to pay dividends.

To understand how big of a change has taken place at the oil companies since 2004, here are the figures below:

Top 7 Major Oil Companies Free Cash Flow Figures

2004 Cash From Operations = …………$139.6 billion

2004 Capital Expenditures = ……………..$67.7 billion

2004 Free Cash Flow = ………………………$71.9 billion

2004 Shareholder Dividends = …………..$37.9 billion

2004 Free Cash Flow – Dividends = $34 billion

2016 Cash From Operations = ……………..$118.5 billion

2016 Capital Expenditures = ………………..$117.5 billion

2016 Free Cash Flow = …………………………..$1.0 billion

2016 Shareholder Dividends = ……………….$40.1 billion

2016 Free Cash Flow – Dividends = -$39.1 billion

Here we can see that the top seven global oil companies made more in cash from operations in 2004 ($139.6 billion) compared to 2016 ($118.5 billion). That extra $21 billion in operating cash in 2004 versus 2016 was realized even at a lower oil price. However, what has really hurt the group’s Free Cash Flow, is the much higher capital expenditures of $117.5 billion in 2016 compared to the $67.7 billion in 2004. You will notice that the net combined dividends didn’t increase that much in the two periods… only by $3 billion.

So, the lower cash from operations and the higher capital expenditures have taken a BIG HIT on the balance sheets of these oil companies. This is precisely why the long-term debt is skyrocketing, especially over the past three years as the oil price fell below $100 in 2014. To continue making their shareholders happy, many of these companies are borrowing money to pay dividends. Unfortunately, going further into debt to pay shareholders is not a prudent long-term business model.

The world’s major oil companies will continue to struggle with the oil price in the $50 range. While some analysts forecast that higher oil prices are on the horizon, I disagree. Yes, it’s true that oil prices may spike higher for a while, but the trend will be lower as the U.S. and global economies start to contract. As oil prices fall to $40 and below, oil companies will begin to cut capital expenditures even further. Thus, the cycle of lower prices and the continued gutting of the global oil industry will move into high gear.

There is one option that might provide these oil companies with a buffer… and that is a new even larger Fed and Central Bank money printing scheme which would result in severe inflation and possibly hyperinflation. But, that won’t be a long-term solution, instead just another lousy band-aid in a series of band-aids that have only postponed the inevitable.

The coming bankruptcy of the once mighty global oil industry will be the death-knell of the world economy. Without oil, the global economy grinds to a halt. Of course, this will not occur overnight. It will take time. However, the evidence shows that a considerable wound has already taken place in an industry that has provided the world with much-needed oil for more than a century.

Lastly, without trying to be a broken record, the peak and decline of global oil production will destroy the value of most STOCKS, BONDS and REAL ESTATE. If you have placed most of your bets in one of these assets, you have my sympathies.

IMPORTANT UPDATE: TO MY FOLLOWERS:

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I believe the economic and financial situation in the U.S. and world will continue to deteriorate over the next two years and will only get increasing worse going forward. Those who understand the root cause of it all, ENERGY, will be better prepared or less shocked (or both) when the collapse picks up speed.

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Another fantastic analysis Steve. It looks like the entire oil industry is in it’s final death spiral which, as you pointed out, will take the rest of the world with it. If you haven’t already done so, please check out Ugo Bardi’s latest book, “The Seneca Effect”. He does a fantastic job of explaining collapse.

I couldn’t agree with you more. Yes, I have heard of Ugo’s new book, but I need to check it out. By the way, I belong to a Google ENERGY TRANSITION and PEAK OIL email group that Ugo Bardi has put together. Also, I have had many email exchanges with Ugo and I really enjoy his site.

Steve, I value your insights and have been lurking on your site for the past two years. I am setting up a Patreon account this weekend and will lend some financial support to your efforts as well as a few others I feel are contributing solid analysis to help us understand the financial, political and social realities vs the false narratives out there.

My question is – in your opinion are PMs the only place to invest? I’m looking for alternatives to PMs so all of my eggs aren’t in one basket. We looked at real estate but agree it’s a losing proposition at this time. I’m trying to find options that will prosper if we truly see the energy markets go through this type of upheaval.

Thanks for what you are doing. It’s valuable work. I run a team of labor analysts and these is often much to be learned and applied by carefully considering alternative virwpoints.

You bring up one of the questions I ponder all the time… and that is, WHAT ELSE TO INVEST BESIDES GOLD & SILVER. That is truly a tough one. While it’s true that it is not prudent to put all of one’s eggs in one basket, there aren’t many other things I would invest in. Of course, a small and modest fixer-upper homes in a small town by farmland would be one to consider. I would stay away from suburban real estate with a 1,000-foot pole, though.

Some people think diamonds are an excellent STORE OF WEALTH, and to a degree, they are. But, I would rather take my chances with gold than putting any money in diamonds, even though diamonds wouldn’t be confiscated as some say there is a chance that gold could be.

If some people had some extra throw-away cash, then maybe a few GOLD-SILVER MINING STOCKS might be something to consider. However, this would have to be with throw-away money.

Lastly, I believe it is time for people to start to INVEST in themselves and what kind of survival, food growing, etc they can do to be more self-sufficient. That would be the BEST INVESTMENT besides gold and silver.

Steve, great article again. It would be interesting to see oil price action in gold instead of dollars. Oil / gold ratio is at historic lows I think. You mention central banks creating inflation. They will and oil prices will move up in fiat terms, but prices will go down in gold terms, as they have for a long time.

Wow! I was actually just thinking the exact same thing tonight regarding PMs as the only place to invest or? See, I guess great minds think alike!I LOVE the work Steve does to educate us…! Brilliant guy!

CM — Bitcoin. Bitcoin. Bitcoin. This was a big fat lob, right over the heart of the plate, and Steve swung wiffed. But first, please *understand* bitcoin. I highly recommend listening to an interview on youtube on crush the street channel titled “The economics of bitcoin and why it’s a long-term asset – Simon Dixon interview”

That’s hysterical!!! I swear someone just told me that the other day, that aliens were going to save us and that the Mother of ALL spaceships would be here to, I guess comfort us! Can you believe that? And I kid you not. The man who told me that has a Master’s or Phd in some science field. Can’t remember what he said but I was laughing my head off..! Some people……!

Hi Steve, Great article but I must disagree with the conclusion. Oil prices are being kept in check or managed by a combination of HFT and suspect data from the EIA. I think the trends that you speak of for the majors will have a great impact on the real producers with are sovereign governments and will cause decline curves to get steeper. Interestingly Matt Simmons felt like a true global recovery would come on the back of a high oil price. Central Banks zero interest rate policies are choking out global growth and they have trained people to believe recovery will come with ZIRP and a low oil price. This is wrong on both counts so I think high oil prices are coming along with higher interest rates. The longer oil prices are kept artificially low the more powerful the recovery will be. Lack in reinvestment is creating a decline curve that few grasp its impact. I think we see $100 before $40. Thanks again for your great work.

I appreciate your input. However, I will have to also disagree with you. I gather you haven’t read the work of The Hills Group on the Thermodynamic study on oil depletion and price. You can check it out here: http://thehillsgroup.org/

Don, I used to believe that supply and demand were the determining forces behind price. I no longer believe that. It has always been the cost of production. Furthermore, the falling net energy in a barrel of oil translates to less energy getting to the market. We must remember, ENERGY is MONEY. How can the market drive up the oil price if the quality of the oil is declining?

I have used this example many times, but you don’t pay TOP DOLLAR for a five-year-old cow or cattle. The quality of the meat is no longer good so, the market pays a much lower price. The same example can be used in a 15-year-old car that is only worth $5,000. The parts in that 15-year-old car have worn out, and the embedded energy has dissipated. So, the market will not pay TOP DOLLAR for an old car.

Lastly, you must understand that the MONEY the public would bid up the price of oil comes from the quality of the oil in the first place. REMEMBER… ENERGY = MONEY. So, the public would not be able to bid up the price of oil because the quality isn’t there.

One must change their thinking, or they will continue to make wrong forecasts or conclusions based on the incorrect financial theory that SUPPLY & DEMAND determines the price.

In 1930, the U.S. Oil Industry was producing 100 barrels of oil for the energy cost of 1 barrel. Thus, we had a 100/1 EROI. By 1970, U.S. oil EROI fell to 30/1. Today, the U.S. Shale Oil Industry is producing oil at approximately 5/1, maybe even less. The problem with a 5/1 EROI of oil, is that our modern high-tech suburban economy needs something north of 12/1 or even 15/1 to be sustainable.

Which means… the 5/1 EROI of Shale is low-quality oil that we really can’t afford when you consider that it can’t sustain the maintaining of the infrastructure, roads, food production and distribution system, etc.

Again, our U.S. Dollar is based on burning oil and energy. If the quality of the energy is low, so is the quality of money. The notion that the public would bid up the price as oil supply falls, goes against THERMODYNAMICS, which as always been the true indicator or price, not supply and demand forces.

I thought this was a good analysis. Right up until I saw that you cite the Hills Group and their terribly flawed “Study”.

THAT will make me have to reconsider. I don’t dispute your debt, revenue, dividend, and cash flow data—they are all right off of the 10k and 10q reports—citing deeply flawed nonsense is deeply concerning and problematic.

Why is the Hills Group research flawed? I saw their analysis from last year, and have been tracking their model ever since. Seems to me they are spot on. Please be specific on what part of their analysis is non-sensical. Thanks in advance.

Steve,
I recall that you have discovered that 10 calories of energy is used to produce 1 calorie of food by industrial farming. What is the breakdown of EROI of meat? In the book Diet for a Small Planet (Lappé,1971), there is a chart of “livestock protein conversion efficiency.”It shows it takes 8.3 lbs of protein feed to produce one lb of pork and 21.4 lb of protein feed to produce one lb of beef.
“Fully one-half of the harvested agricultural land in the U.S. is planted with feed crops.”
As you can see we use a lot of energy for our prodigious diet.

Chickens grow at about 1.1 pounds of feed per pound of bird. If you let them roam, they eat lots of free things including pests like ticks and mice, which cuts your feed cost. A chicken in every yard gives you eggs and meat. Grass fed beef (the best kind) eat non-human food and concentrate it into wealth. Pigs eat every kind of calorie you would not eat, to make bacon. 4-H and FFA animals are the finest and fetch the most money. The problem is industrial mono-critter farming with the object as the cheapest possible simulation of food. “cheap” meaning “powered by imported crude oil” to make the food calories with little human effort (making obesity possible and common)

SRSroccoraco is a flaming optimist. He has not researched the coming mini-ice age. We are heading into two sequential 11 year cycle solar minimums, with the second one overlaid by the 400 year cycle driven by solar system positioning of the 4 largest planets and their influence on tides on the molten solar surface. We will have a significant cooling by 2019 with major decline in food production. The world population die-off due to starvation, exposure, pestilence, etc may be 50% by 2030 and 80-90% by 2040 when it starts to warm up again. It appears that no financial forecasters acknowledge extensive global cooling in the next two decades.

Obviously the world financial system will collapse by 2024. Ultimately, less than 10 % of the worlds production will survive or be required to support the surviving population. World oil production will decline to 10 % of current production by 2030. There will be rampant deflation with anything you might want to buy laying around to pickup including housing that cities will give to you to have a paying customer for water and sewer. The price of oil may go back to $10. There will be only 3 oil production companies remaining, one in China. China and India will survive the great “thinning of the herd” best as much of their population is only one generation or less removed from personal food production and living on the soil.

As usual wars will break out by desperate countries/leaders/people contributing to the die-off. The United States will breakup into several/numerous republics. Long live Cascadia.

I agree with most of what you stated in your comment except for the Mini-ice age. For a mini-ice age to occur, it would have to freeze from the Arctic downward. However, the Arctic is heating at five times the rate of the planet. Thus, we are heading into an ABRUPT CLIMATE CHANGE and an EXPONENTIAL WARMING TREND, not a mini-ice age.

Two years of decline in sea surface temperature is hardly a noteworthy trend in the context of long-term climate change, but it’s the sort of “evidence” so frequently cited by the scientifically illiterate. More importantly, however, the assertion that “the world’s ocean temperatures have fallen for the past two years per NASA” is demonstrably false. NASA’s DataGISS website shows that global sea surface anomaly (difference from the long-term average) was .57 deg C; in 2015 it was .69 C, and in 2016 it was .7 C. That’s continued rise, not decline. (Source: https://data.giss.nasa.gov/gistemp/graphs/) During the past three decades, sea surface temperatures have exceeded the last century’s average every year. (Source: http://www.globalchange.gov/browse/indicators/indicator-sea-surface-temperatures)

I hate to break this to you but China will not survive what’s coming and for many reasons. China has defined itself as the USA 2.0 with it’s rigged markets and banking system. In fact they did more QE than the US after 2008 by a factor of 3. They have a much larger shadow banking system. China has to keep the “Gerbil” running as fast as it can from having 1.2 billion of it’s population going insane. That’s why they continue building ghost cities and factories because they have to. India is a poverty stricken sh*thole that is overpopulated.

Once the meltdown begins everything will come crashing down. If you don’t believe read Hank Paulson’s book to get an idea how bad 2008 really was. He told G.W. Bush if they didn’t bail out the banks, the world economies would come to a halt and there would have been Martial Law in the US with tanks roaming the streets to keep law and order.

You say oil oil oil . .
I say war war war . .
You will see that all your work ist going to fall apart in the coming war.
The things you point out ARE the reason why we will see war.
It’s not just oil and food. Everything is falling apart . .
Endgame. Either Nato or Brics win the world and all ressources . .

Damn Steve,
This is an intense analysis with some gutsy data and observations, and followed up with some interesting comments. So good to read some alt-media site that doesn’t serve up the same old parroted BS.

Thanks for the kudos. Yes, I believe we see EYE to EYE on the ENERGY ISSUE. Unfortunately, most alternative analysts still don’t get it. I continue to receive emails from analysts in our community who tell me the real problem is DEBT not ENERGY.

Allot of work. But do you know how these companies work? Is it not normal for them to invest in down turns since acquisitions and divestment is very active in such times? Are these debts not used to buy new assets at good prices and squeeze suppliers for good prices and realize projects at lower break even? What about the investments these companies are making in renewable energy? Is that part of the debt pictu5you show?

The falling RETURN ON EQUITY EMPLOYED reveals the BIG TROUBLE at the World’s Largest Oil Companies. Furthermore, ExxonMobil quadrupled its CAPEX spending since 2002, but its liquid oil production today is actually lower.

Unfortunately, the oil price will trend lower, even with brief spikes. A lower oil price will continue to gut the U.S. and Global Oil Industry.

Hi Steve this low eroi of the oil majors is very likely linked to the dying petro dollar as many countries trying to shift the once king dollar for some other means of exchange.
I tend to believe we will have many more years of very low intrest rates due demographic
changes throughout most of western societies. Still I believe coal, oil, gas will remain with us for decades to come and technology is still improving. I bet we will see much higher oilprices again as the commodities is very cyclic same as stockmarkets in our fiat system.

The plan is to reduce the population,especially in usa and europe,when war starts it will be in the winter in the northern hemp. which has the largest population people will freeze and starve.
also i agree with Quixote we are going into a min-ice age.

Steve, I am sorry that I forgot to thank you for all your hard work and if this was a normal
world, your analysis would be spot on, but we are deal with crazy satanic monsters that would
rather destroy the earth than to lose power.

I have listened to you on a couple of You-tube interviews and read some of your work. Your level of analysis and alternative perspective is simultaneously fascinating and frightening. I do not believe the global warming hype (watched a very persuasive Australian geologist dis-assemble the global warming case on another site) and am just beginning to investigate the solar minimum theories so I am somewhat fence-sitting on the future of the climate. That being said, – as much as you can or are willing on a public forum – what do you think the real prospects for humanity are? Is it a return to the 1800’s with sailing ships and wood-heated houses with the incumbent die-off of large swathes of the population or are we going to somehow stumble through this after a large re-set/reorganization? I think every person with their ear to the ground hears something coming but the sound is muffled and exactly what is coming is hard to read. Thoughts?

Steve, I am thankful for the excellent work that you do and the intelligence of your readership. I feel like this is the only place where there are people with the remaining intelligence and sanity in the world.
I would like to give you an added piece to the EROI prediction puzzle. It is called the Petrocurrecy Mercantilism with this and EORI you can predict the net 3 months. The best location to understand it is here http://cultstate.com/2015/02/28/petrocurrency-mercantilism/ there are others at the WSJ and Barron’s but this is better.
Again Thank you for being the sanity gatekeeper!

Couldn’t agree with you more about our buddy and pal, Elon. Yes, Musk is a distraction, and actually, a bad joke. Electric cars and renewable energy are nothing more than Fossil Fuel Derivatives. Without the burning of coal, oil, and nat gas, Electric Cars and Renewable Energy wouldn’t be possible. Also, I wonder where Elon is going to get the material to make Tires without oil?

Lastly, I find it quite interesting that the motivation to leave this planet and colonize another is because we totally F*CKED this one up. Wisdom suggests that we colonize another planet after passing the test of being able to live sustainably on this one. But, of course… wisdom is in short supply lately.

Mars is silly, if the world goes into chaos (financial or otherwise) Who is going to send supplies to Mars.
Electric cars are a great idea, save the remaining oil for the tires, not for us to breathe. However, the ramp up of electric production is most likely too little too late.
We tried, then we died.

1. I don’t think central bank(s) action can overcome thermodynamics. For that reason (among others), I don’t think any inflationary scenario is realistic (at least not until after a very deflationary one—which fits with your prediction of most asset classes declining in value). After all, if they could, wouldn’t the industry be doing better financially right now?

2. Attributing the consequences to falling EROI alone (which I don’t necessarily think was your intention) doesn’t take into account the timing of the financial aspects of the industry’s recent history. This (inadvertent?) overweighting of EROI could be seen as a weakness in your assessment, in particular because you didn’t provide evidence (in this piece, at least) that demonstrates and quantifies that decline. While it’s ‘common knowledge’ to some of us, this information won’t gain traction in the mainstream (or simply be dismissed) if there are any points of weakness to attack.

Thanks for your two points. I agree with your first point in that Central banks cannot overcome thermodynamics. However, they have already proved that they can do it by moving things around to keep the system going a bit longer. The massive money printing and zero interest rates are what allowed the U.S. Shale Oil Industry to produce subpar oil the market really couldn’t afford. By that I mean, the Fed & Central Bank monetary policy allowed the Shale and Tar sands operations to steal energy from other areas and industries to produce low quality oil.

Now, if the Fed sends out $10,000+ checks to each American, then we would see serious inflation or possibly hyperinflation. That would also push up the oil price, thus giving these oil companies a bit of a breather. But not for long. As you probably realize, costs would increase as well. However, lowering interest rates and printing more money would postpone the inevitable a bit longer.

As for your second point, I agree that I did not provide the actual detailed data showing how the Falling EROI is impacting the global oil industry. However, there isn’t the available data on the Falling EROI that would prove my work, except possibly the Hills Group analysis.

That being said, the Falling EROI is the overwhelming factor that is gutting the entire global economy. We see it in the retirement and pension markets as well as in many other industries. As for your statement that “overweighting of the EROI could be seen as a weakness,” is an interesting one. I hadn’t given it any thought about the correct weighting of the EROI, except that it is the overall BAROMETER for the entire economy and financial system.

I can assure you, if these Oil Majors started to cut their Dividend payouts, such as ConocoPhillips and Petrobras, there is no real motivation for investors to hold the stock when the situation in the energy industry disintegrates. So, you see, the Falling EROI is impacting the financials. At some point, these companies will have to cut dividends. This will undoubtedly be the beginning of the END for the global oil industry.

I left out part of my first point, which was that beyond thermodynamics economics also plays a part on the consumer side. While the commodity nature of oil is more directly a financial matter, ultimately the products need to be bought. It’s at that level — the economic — that the Fed’s actions with regard to future influence (or not, as I believe) is a factor. I think they’ve reached the limit of influence (or are very, very near to reaching it — one more goosing of the market before year end? Maybe?). People and companies can’t buy what – and more to the point, quantities that – they can’t afford.

“Now, if the Fed sends out $10,000+ checks to each American…”

I don’t think your article suggested such a thing, so this seems a bit grasping at straws (and brings to mind, “If pigs could fly…”).

“That being said, the Falling EROI is the overwhelming factor that is gutting the entire global economy.”

That’s the overweighting I referred to. A matter of word choice, mainly. Without the (understandably so, thanks for the note on lack of data) supporting evidence regarding declining EROI, not giving at least some weight to financial and economic factors, perhaps just by ‘toning down’ “overwhelming” to “primary” (for example) weakens your case, imo.

I agree with you, but then I’m not part of the audience that would gain a new perspective from taking all this in. To them, whatever impact EROI has on dividends (to use your example) is invisible — they only see the financial aspect (as do we, because in the absence of direct evidence we’re really just assuming that the laws of thermodynamics hold).

Their assessment for coal is beyond “counter intuitive”. Either I’m not understanding something fundamental (and large) or they overlooked some of the “invested”-side energy required to get useful energy from coal.

I believe TPTB only have one option. If they can’t increase energy production then they must cut energy consumption and soon. To think that they’d wait for the inevitable depletion of energy reserves so that nothing is left for the 1% is at best wishful thinking. I believe the power blocks are holding off because they can’t figure out how cull the population while mitigating the unintended blowback. Pure speculation on my part, but I think it’s something we need to consider. An extended government shutdown, non-payment of social security checks, and a bond failure, would be a good way to start cullling the aged, unprepared, and infirm. Just because your paranoid doesn’t mean someone is not out to get you.

This article makes a good attempt at an energy company valuation, but actually provides only a partial formulation of how value growth or destruction is determined for an energy company overtime, so its assessment is incomplete. This has been debated numerous times over the years and the correct comprehensive two dimensional valuation formula which also provides a surrogate IRR, builds on the basic Sterns/Stewart eva/mva modeling concepts for the more complex energy industry, has been published in the Oil and Gas Investor (“A New Yardstick for Measuring Value Creation”, Oil and Gas Investor, July 15, 1995, Gupta, Lin, Malarkey and Rachiele)and has been cited in numerous scholarly publications.

Thanks for the additional data. Actually, I agree with you that the article wasn’t a complete analysis of the Global Oil Industry. It wasn’t my intent to put out a comprehensive study of the oil industry, rather highlight data that provides us (common folk) with additional clues to the ongoing disintegration of the global oil industry.

Morever, the “New Yardstick For Measuring Value Creation” analyzes the complex oil industry in a vacuum. By that, I mean, without considering what the Fed & Central Banks have done to prop up the markets, especially since the 2008 Financial and Economic Collapse. While that study and others like it (published more recently) provide extreme detail about the valuations of oil and gas industry, (I have looked over a few), they are guilty of being:

1) Too specialized and overly complex.
2) Do not incorporate into their models what the Fed and Central Banks are doing to manipulate the overall system.

I view these sort of studies as spending hours and complex mathematical equations to figure out how to use a hammer to hit a nail. I am not trying to be disrespectful about the work these analysts are doing, but the disintegration of the global economy will likely occur much faster than these individuals realize.

Let me put it another way. The scientists doing the research and putting out the IPCC reports on Global Climate Change are similar in style to the work by the analysts you quoted. However, the actual field studies documenting the accelerated changes taking place in the Arctic and Northern Siberian Arctic Shelf make the conservative calculations and forecasts published in the IPCC Reports, quite meaningless. To put it bluntly, the IPCC Reports are a BAD JOKE to the scientists who understand the exponential trend and the fast rates of change that are really taking place.

Something far more concerning.
Population reduction.
The human population of the world was fairly stable at about 2 billion for thousands of years. Since this was the number of people that the world could support (feed) through biomass, using human, animal, and to a small extent water power.
Then 200 hundred years ago came the industrial revolution, powered by the use of coal and steam engines. Soon after switching to the hyperdrive use of petroleum and the internal combustion engine.
The world human population has exploded in the past 200 hundred years from about 2 billion to now about 8 billion people. It has been estimated that the maximum number of humans, which the biomass of the world could support to be about 3-4 billion.
Anything above that amount owes its existence to oil and will perish without it.

“Conclusion: The global warming “hockey stick” is SCIENCE FRAUD
The IPCC, it turns out, used science fraud to promote global warming and “climate change” narratives, hoping no one would notice that the entire software model was essentially HACKED from the very beginning, deliberately engineered to produce the alarming temperature trend the world’s bureaucrats wanted so they could terrorize the world into compliance with climate change narratives.

The Russians didn’t hack the 2016 election, in case you were wondering. But dishonest scientists really did hack the global warming modeling software to deceive the entire world and launch a whole new brand of climate change fascism that has now infected the minds of hundreds of millions of people across the planet. Everything they’ve been told about climate change, it turns, out, was all based on a software hack.”

There is a reason that I do not comment much on the CLIMATE CHANGE SUBJECT. And that is due to the tremendous amount of ignorance and misinformation on the subject matter by those who believe they got the facts. So, I will continue to keep my comments from here on out to myself.

Amazing how all the investment in exploration is failing to find new oil feids to replace the ones that are in the final stages of production. Accurately trying predict near term energy prices go is a fools game. There are to many variables. What is certain the next generation is going to have to make do with a much reduced energy diet. This is a disaster for the economies and way of the western world. Much will change over the next decade, the only certainty is most of us will live much simpler lives. Great piece Steve’.

Steve: How do you think global de-dollarization will affect America’s imports or consumption of oil?

I’m guessing US offshore drilling will gain strength, but productive wells may not produce significantly for years. debt levels being what they are, it seems almost impossible–without debt forgiveness.

Steve,
Higher up in the thread you mentioned the possibility of investing in high quality diamonds. I would highly discourage this type of investment. More and more lab created diamonds are being produced by companies that are flawless and can be made in great quantity. According to my sources, this will cause a crash in the market price of diamonds in the next 5 year time. Most people do not care if there diamond(or ruby or sapphire for that matter) is natural or lab created. In fact a company I believe called Brilliant Earth pretty much
sells only lab created diamonds. Great site BTW

Thanks for the additional info on DIAMONDS. Yes, I agree with you about diamonds, and I believe in the comment I stated that “Some people believe” that diamonds are a good store of value. But, I would not purchase diamonds over gold.

Steve, “lower quality oil” means only one thing, and that is that the BTUs per average barrel are declining as fields age. This might result from increasing asphalt in the oil, for example. A better metric than “per barrel” might therefore be “per million BTUs” because all barrels are not created equal. (Or perhaps I’m missing an industry convention of some sort here.)

“Energy invested” per barrel has increased over time because oil has been increasingly difficult to recover (e.g. shales requiring fracking and deep sea operations).

So, EROEI is declining for two reasons. One, the lower quality oil (energy return), and two, the greater energy required to recover it (energy invested).

If this simplification is erroneous or deficient, I would greatly appreciate your comments.

Also, I’m still struggling with EROI versus EROEI. When the subject is oil price, debt, interest rates, dividends, etc., I tend to think that we’re talking about Energy Return on Financial Investment rather than Energy Return on Energy Invested. I wonder if you would please resolve any ambiguity in these terms.

Debt does not matter to corporations, or government, with negative real interest rates borrow and spend, flip the debt, then give yourself another raise or bonus, merge, declare bankruptcy, deploy the golden parachutes or sell the shell, the CEO gets paid either way. As far as borrowing, they are just increasing their short position on the dollar, when negative interest rates come they will be rewarded. It’s not right, but that’s the direction we are headed. Are we blowing the biggest bubble to date yet?, for sure we are.

Great article Steve… and some interesting comments. I tested your essay out on my friends at breakfast this morning. Their minds are trapped in a world of never ending energy. Their final solution is very naïve; “Technology will save the day”.

Still trying to distinguish implications and definitions of EROI vs EROEI.
These need to be clarified.

As you say, capital can be diverted from productive (or even non-productive industries) to finance oil production, which will, in theory, cause the “price” to go up in the traditional economic theory vacuum- for a while. Therefore, I would not be surprised to see a short-term oil price increase before the Seneca Cliff becomes obvious to all when the economy gets hammered and oil prices drop from the one-two punch:

1.) The high “price of oil, even in terms of fiat currency, EROI, causes the economy to tank.

2.) Then the realization kicks in that even if an unlimited amount of “capital” is available, we will have run into the EROEI wall. We will realize that we need a barrel of oil, not more capital, to get the next barrel of oil out of the ground. This will result in the economic Seneca Cliff. The rate of economic decline outstrips the paradoxical decline in oil production.

Thanks for all of the great work and analysis Steve. My question is that despite the inability to see a significant rise in the price per barrel of oil, would we still not see a ballooning price of gasoline at the pump? I live here in Canada where when in 2008 the price of oil WTI hit 147 dollars per barrel we hit approximately $ 1.38 per liter. Now with the price of oil around 50 we are sitting at around $ 1.10.

I believe the issue is the Refineries aren’t making much in the way of profits. I have heard that some refineries make their money from their pipeline operations, not from refining oil. Unfortunately, many analysts aren’t considering what happens when a lot of the $300+ trillion in debt starts to pop. We could see the price of oil fall to $20, with a gallon of gas going for less than a Dollar, but a lot of people may not have the money to purchase it.

Hello Steve, you had very kindly allowed me to repost one of your articles on the Saudi reserves at newsilkstrategies.com. My site focuses on Russia and China. I see some comments in your forum indicating that the Chinese are following the US down the QE path. Would you be able to comment on the situation of Rosneft, for example? Is the EROI situation as bad in Russia (or even Iran or Venezuela) as in the West? I ask because those countries are weaning themselves off the USD. Thanks!

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